Decomposing the Growth of Portugal: A Case for Increasing Demand, not austerity, in a Small European Economy

This paper presents an analysis of Portugal’s economy from 1999 to 2015, providing an alternative to explanations that present the situation faced by Southern European countries after the Great Recession as a matter of excessive expenditure or loss in competitiveness.

Based upon the Sraffian Supermultiplier model, we look at how demand components evolved along the analyzed period, in a growth accounting setting. This assessment evidences that insufficient effective (public) demand — not balance-ofpayments constraints nor an alleged excess of public expenditure — is what explains Portugal’s low-to-negative growth rates from 2001 forward. Given the limited productive structure, a labor market that is not strong enough to guarantee a solid internal credit expansion and the present institutional setting (which makes fiscal expenditure an also limited source of effective demand), we conclude that the only way for Portugal to abandon the low growth path would be a more cooperative fiscal stance from the European Union.